90 Days Period for Scheme of Arrangement – Mandatory or Directory?

[By Chetna Alagh]

The author is a student of UPES, Dehradun.

 

The process of schemes of arrangement, which falls under the purview of the Companies Act, 2013, has a significant role to play in the dynamic world of corporate complexities. These arrangements provide businesses with a methodical way to restructure their operational and financial situations. A company is legally allowed to restructure its financial debts using a scheme of arrangement if it can reach an agreement with all its stakeholders, including creditors, debtors, and holders of debentures. Once the proposed plan gets approved, it becomes enforceable against all parties.

Section 230 of the Companies Act, when read in consonance with Regulation 2-B of the Insolvency and Bankruptcy Board of India’s (IBBI hereinafter) Liquidation Process Regulations 2016, establishes guidelines for the approval of time period in relation to “Schemes of Compromise or Arrangement”. Regulation 2B specifically addresses the time period for the scheme of arrangement when the company is in liquidation. It specifies that the proposed scheme of compromise or arrangement shall be completed within 90 days of the order of Liquidation. The persons who are not eligible under the Insolvency and Bankruptcy Code of India, 2016 (IBC, 2016 hereinafter) to submit the Resolution Plan shall not be a party to such compromise or arrangement.

A significant question that arises with regard to schemes of arrangements or compromise is the fundamental character of the 90-day period required by Regulation 2B i.e., whether or not this period is directory or mandatory in nature.

In the case of Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd., the apex court talked about the interplay between the IBC, 2016, and Section 230 of the Companies Act, 2013. The court stated that the IBC and Section 230 must be construed in harmony. It was determined that suggested compromise or arrangement solutions should follow the IBC’s guiding principles, particularly in situations when companies are in liquidation. This was held keeping in view with the objective of safeguarding businesses against poor management and going into liquidation. The court ruled that Section 230 and the IBC are inextricably linked when addressing firms that are in liquidation, rejecting the claim that Section 230 stands alone and has no relationship to the IBC.

In the case of Bharat Sharma Resolution Applicant vs. Reshma Mittal RP & Anr the National Company Law Tribunal (NCLT) order was the subject of the case’s appeal. The main question was whether the appellant, an MSME, should have been permitted to propose a compromise/arrangement scheme under Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, and whether the rejected Resolution Plan of the appellant should have been taken into consideration. The Liquidator argued that liquidation was the best option given the failure of the plan. It was held that the 90-day window under Regulation 2B was flexible and that the appellant should be permitted to submit a compromise/arrangement scheme within a month as per Section 230 of the Companies Act. Even though the 90-day window had passed, the appellant was allowed to submit a scheme of arrangement within one month, the tribunal did not view the 90-day window as an inflexible requirement, but rather as a directory provision.

Further, in the case of Kshitiz Gupta (Liquidator in the matter of Abhishek Corporation Ltd.) Vs. Asset Reconstruction Company (India) Limited and Ors, the tribunal was asked to rule on how the Companies Act of 2013’s Sections 230 to 232 should be applied when a corporate debtor is being liquidated under IBC, 2016. The issue was whether the liquidator should try to save the business by reaching a scheme of arrangement with the creditors in accordance with Sections 230-232, and if that failed, move forward with the asset sale. It was held that the liquidator should prioritize trying to revive the company using the procedures outlined in Sections 230-232 of the Companies Act, 2013, and that these proceedings could take longer than the usual 90 days and emphasized that asset sales should only be pursued in cases where Sections 230–232 revival efforts have failed. This interpretation permitted a more adaptable strategy, acknowledging that the precise timetable for revival efforts and legal actions could change depending on the situation. The decision emphasized that when considering the revival and arrangement processes under the Companies Act, 2013, adherence to the strict 90-day period was not required.

In the context of an ongoing liquidation processing the case of Small Industrial Development Bank of India and Ors vs. Delicious Cocoo Water Pvt. Ltd. and Ors, the tribunal was asked to decide whether to accept or not a Scheme of Arrangement pursuant to Section 230 of the Companies Act, 2013. The main issue was whether the submission deadline outlined in Regulation 2B (1) of the IBBI (Liquidation Process) Regulations, 2016, was mandatory or merely directory in nature. It was held that the timeline can be extended if it serves the scheme’s purpose as there was no specific timeline prescribed in the IBC, 2016 itself for submitting such a scheme. The tribunal’s decision emphasized the IBC’s goals of maximizing the value of a corporate debtor’s assets and favouring resolution over liquidation. As a result, the tribunal ordered the liquidator to present the proposed plan as soon as possible for the creditors’ consideration, maintaining the status quo with regard to the corporate debtor’s assets until the creditors decided regarding the plan’s viability.

However, in the case of Mr. Harish Sharma vs. C&C Constructions Ltd. & Ors, the appellant sought an extension of the timeline for a scheme of compromise. It was held that the appellant had not met the requirements to request an extension of the deadline for submitting a compromise and arrangement plan, i.e., a formulated and ready plan was not demonstrated by the appellant, and their proposed plan was not approved by at least 75% of the secured creditors. Furthermore, no proof of the scheme’s readiness had been provided by the end of the process’s prescribed 90-day period. Therefore, it was concluded that the Adjudicating Authority’s decision to deny the extension request was justified.

Through the analysis of the above-discussed judicial pronouncements, it can be concluded that the time period shouldn’t be rigidly enforced and is further supported by the approval of extensions. However, it should be made sure that extensions are granted for good causes in order to avoid irrational delays that can undermine the aim of the code. Therefore, IBC’s focus on finding a balance between resolution and liquidation, as well as its provision for appropriate delays, highlights the necessity for a strategy that combines adaptability with focused direction. The time period of 90 days to complete a scheme of compromise or arrangement is directory in nature and the tribunals have granted more than 90 days’ time if there is a chance of approval of the arrangement of the scheme. The tribunals should always keep in mind that the ends of justice will be served by giving liberty to the parties to submit their scheme of compromise or arrangement when their scheme proves to be bonafide and is likely to pass the muster of law.

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